3/8/13

It
is very clear that the Banks should follow RBI guidelines on
Asset-Classification before classifying any loan account as ‘Non-performing Asset (NPA)’. There
were judgments saying that it is mandatory for the Banks to follow RBI
guidelines while classifying an account as ‘Non-Performing Asset (NPA)’ and any
deviation in this regard can vitiate the proceedings initiated under SARFAESI
Act, 2002. While RBI guidelines are detailed when it comes to Asset Classification
and related issues; the Bank officials or the Banks may have to make a
subjective assessment of certain issues. It is understood from the reading of
RBI guidelines on Asset-Classification that genuine borrowers facing temporary
difficulties may be treated separately and based on reasonable assurance of
recovery. Guideline 4.2.4 of RBI guideline deals with the issue of ‘accounts with temporary deficiencies’
and narration of few of the temporary deficiencies in the said guideline appear
to be ‘inclusive’ in nature allowing the Bank to make certain subjective
assessments on case-to-case basis. Obviously, no creditor and especially
secured creditor want to harass a genuine borrower having a good track-record
with the Bank for a considerable time. However, with constant emphasis on the
issue of reduction of NPAs, it seems that the Banks are very strict while
getting the accounts classified as ‘NPAs’. The most important thing about the
issue of recovery by the Bank is that they are allowed to proceed against the
borrower for default in any of the facilities availed by him when a borrower
avails multiple credit facilities. Banks are asked to initiate recovery
proceedings ‘Borrower-Wise’ and not ‘Facility-Wise’ and it is very clear in the
RBI guideline 4.2.7. Again, Banks
are not supposed to lay complete focus on the value of the security available
with the Bank as such while initiating the recovery proceedings and it is very
clear in RBI guideline 4.2.3.
The extract of the said RBI guidelines are as follows:

4.2.7 Asset
Classification to be borrower-wise and not facility-wise:

i) It is difficult to envisage a situation when
only one facility to a borrower/one investment in any of the securities issued
by the borrower becomes a problem credit/investment and not others. Therefore,
all the facilities granted by a bank to a borrower and investment in all the
securities issued by the borrower will have to be treated as NPA/NPI and not
the particular facility/investment or part thereof which has become irregular.

4.2.3
Availability of security / net worth of borrower/ guarantor:

The availability of security or net worth of
borrower/ guarantor should not be taken into account for the purpose of
treating an advance as NPA or otherwise, except to the extent provided in Para
4.2.9, as income recognition is based on record of recovery.

Again, dealing with the issue of temporary deficiencies in adhering to
the terms of the loan agreement, RBI guideline 4.2.4 says as follows:

4.2.4
Accounts with temporary deficiencies:

The classification
of an asset as NPA should be based on the record of recovery. Bank should not
classify an advance account as NPA merely due to the existence of some deficiencies
which are temporary in nature such as non-availability of adequate drawing power
based on the latest available stock statement, balance outstanding exceeding
the limit temporarily, non-submission of stock statements and non-renewal of
the limits on the due date, etc.

The
problems for many borrowers or the Small Businessmen availing the loan
facilities from the Bank comes from the issue that the Banks are asked to
initiate recovery proceedings ‘borrower-wise’ and not ‘facility-wise’.
Borrowers availing facilities from the Bank with the complex commercial
arrangements and agreements face problems with this discretion available with
the Banks or the Bank Officials. Many complain that there is no effective
redressel mechanism to raise all these issues even when the borrower has a very
good case for restructuring or for questioning the judgment of the Bank in
classifying a particular account as a ‘Non-Performing Asset’. In most cases,
the borrowers are driven either to approach the High Court under Article 226 of
Constitution of India challenging the classification of an account as NPA or the
borrower may have to inevitably file an Appeal before the Debt Recovery
Tribunal under section 17 of SARFAESI Act, 2002. Even-though Banks can consider
the proposal for restructuring of a loan account upon certain conditions and
re-negotiating the terms, Banks do exercise great discretion in this regard. Coupled with this situation, as the Banks can
argue that the value of security has got nothing to do while classifying an
account as NPA, genuine borrowers or borrowers/small businessmen with temporary/genuine/understandable
problems face lot of pressure and problems. For example, an industry may have a
very valuable property lying with the Bank as a security and may be facing some
problems in its business with the obvious reasons which are beyond its control,
and in such cases also, if the Bank is not convinced, the borrower becomes
remediless.

Emphasis
has always been laid on the issue of recovery and establishing an efficacious
internal system by the Banks and Guideline 4.2.2 of RBI guidelines says as
follows:

4.2.2. Banks
should establish appropriate internal systems to eliminate the tendency to
delay or postpone the identification of NPAs, especially in respect of high
value accounts. The banks may fix a minimum cut off point to decide what would constitute
a high value account depending upon their respective business levels. The
cutoff point should be valid for the entire accounting year. Responsibility and
validation levels for ensuring proper asset classification may be fixed by the
banks. The system should ensure that doubts in asset classification due to any
reason are settled through specified internal channels within one month from
the date on which the account would have been classified as NPA as per extant
guidelines.

RBI guidelines on ‘Asset Classification’ are well-balanced and the Banks
are asked to make many subjective decisions and RBI guidelines do focus on the
issue of not harassing genuine borrowers while emphasizing at the need of
speedy and efficacious recovery. Along with the provisions dealing with the
restructuring of loans or advances, RBI guidelines also deal with the issue of
up-gradation of loan accounts classified as NPAs and the relevant RBI guideline
in this regard is as follows:

4.2.5
Upgradation of loan accounts classified as NPAs:

If arrears of interest and principal are paid by
the borrower in the case of loan accounts classified as NPAs, the account
should no longer be treated as nonperforming and may be classified as
‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled
account which is classified as NPA contents of paragraphs 11.2 and 14.2 in the
Part B of this circular will be applicable.

On certain issues, RBI guidelines are very clear as to when an account
should be treated as NPA. But, with regard to providing relaxation or
understanding the temporary difficulties of the borrower while considering
upgradation of loan account or regularizing the loan account, Banks do exercise
lot of discretion. If at all the borrower feels that the Secured Creditor or
the Banks are unfair in dealing with his loan account or loan accounts, he can
do nothing except approaching superior officers, approaching Banking ombudsmen
or approaching High Court under Article 226 of Constitution of India. Though,
even the DRT (Debt Recovery Tribunal) can consider all objections raised by the
borrower while entertaining an Appeal under section 17 of SARFAESI Act, 2002,
DRT may not have power to analyze a particular case in the light of RBI
guidelines in its entirety though DRT can certainly look into the guideline
dealing with the criteria for classifying a particular loan account or accounts
as ‘Non-performing Assets’. Normally, Banks do not commit any mistakes in
classifying an Account as NPA applying the RBI guidelines strictly. Apart from
the criteria, the DRT can look into the issue of ‘debt’, objections regarding
debt and the correctness of the procedure followed by the Bank under SARFAESI
Act, 2002. Normally, Banks do not commit mistakes in the procedure and the borrower
will have objection to the classification on the basis that he is not a
willful-defaulter and the deficiency in making payment is temporary in nature.
However, these things are not considered by the DRT normally as I think and
they may not have power to consider all these issues in-spite of various
judgments of the Constitutional Courts from time to time emphasizing at the
powers of the Tribunal under section 17. Only due to the judgments of the
Courts, the borrowers are allowed to question every measure initiated by the
Banks under SARFAESI Act, 2002 now and technicalities are normally ignored
while entertaining appeals under section 17. It is also clear that they can
look into all objections pertaining to the loan account or even raised by the
third-party if he is connected. The Civil
Court may be having limited jurisdiction to look
into the issues connected to the SARFAESI proceedings and the jurisdiction of
the High Court under Article 226 of Constitution of India is largely dependent
on the facts of the case, and the discretion of the Court.

Now, if the Bank takes a decision to classify an account as NPA and
rejects the objections or the request by the borrower, then, apart from writ
remedy, the remedy available to the borrower is to file an appeal under section
17 of the SARFAESI Act, 2002. Based on the merits of the case, the DRT will
grant interim relief and finally, only when it is established that there is a
procedural irregularity, the DRT will allow the SARFAESI Appeal and can order
the restoration of property if the physical possession has already been taken
by the Bank pursuant to steps taken under section 13 (4) or by taking
assistance of the police etc. using the mechanism provided under section 14 of
SARFAESI Act, 2002. In many cases, DRT can insist on payment of some deposit
while granting an interim-relief when the borrower approaches the Tribunal
under section 17 of the Act challenging the proceedings initiated by the Bank
under SARFAESI Act, 2002. If the Bank proceeds with the proceedings even during
the pendency of the Appeal under section 17, then, it becomes further more
complicated to the borrower and it is very often heard that the borrower is
asked to file another appeal literally instead of looking into all developments
in the pending Appeal itself by way of entertaining affidavits or petitions in
the pending Appeal. Filing an Appeal against the order of the DRT to the DRAT
under section 18 is another big process and many normally get discouraged to do
this in-view of pre-deposit condition. In each and every step, the borrower is
discouraged and made to run from pillar to post even in cases with some merit
and it is the view of many of the professionals or the borrowers facing
SARFAESI proceedings. There is no reason as to why Appeals can’t be speeded-up,
additional Tribunals can’t be set-up. If Appeals are speeded-up and if
sufficient Tribunals and Appellate Tribunals are constituted, then, at-least
genuine borrowers seeking remedy may feel protected and at-present, every case
of so-called default is treated in a same way.

The SARFAESI Act, 2002 (The
Securitisation and Reconstruction of Financial Assets & Enforcement of
Security Interest Act, 2002) seems to be proceeding on the basis that the Banks
or the Bank officials do not commit any mistakes. It is quite possible to
ensure speedy recovery through special legislations like SARFAESI Act, 2002 and
also giving confidence to the borrower that he will be heard fairly especially
when the borrower has got a very good track-record and long standing relation
with the Bank along with having valuable and marketable security lying with the
Bank. It is quite possible. Now, it seems that there is an amendment or the
provision allowing the Authorized Officers to bid for the property when there
were no bidders initially and the reason given for this step is that it will
allow the Banks to clean-up their balance-sheets. But, this kind of provisions
can harm the borrowers and already it has become extremely difficult for the
borrowers to establish or state his case and coordinating with the Banks. If
there is too much pressure from the Banks when the businesses are not doing
well for the reasons beyond their control, then, small business may be
suffering irreparable loss if the Bank doesn’t understand their concerns
reasonably and sympathetically. Normally, at-times, taking note of industry
specific problems, the Finance Ministry may come-up with some kind of
directions to the Bank to be lenient or understandable while insisting on the
speedy recovery in-respect of some specific industries and Banks also are asked
at-times to post-phone the recovery process also.

Instead of
discouraging the borrower to get any remedy or forum to advocate his problems,
the legal frame-work governing recovery of secured loans can still be very
fair, few more Tribunals and Appellate Tribunals can be constituted and
well-drafted powers are to be conferred on the Tribunals to even give
directions to the Bank when needed and in-favour of the borrower. For example,
if the loan to be recovered is only 10 lakh and the security lying with the
Bank is worth 50 lakh admittedly, and if the borrower seeks for payment of
outstanding loan amount with interest and charges seeking regularization, then,
DRT should be able to give direction to the Bank to accept the proposal. Delays
in adjudication can certainly be curtailed and technicalities can be ignored
while entertaining pleas from the Borrower.

Admittedly,
on the issues of reduction of interest, acceptance of OTS etc., Banks will have
their own internal systems and DRT may have little role in this regard.

With many
more stringent provisions like allowing the Banks to file Caveats before
Tribunals under SARFAESI Act, 2002, allowing the Banks to bid for the
properties; discretion of the Banks or the Bank officials has grown like
anything and the borrower increasingly feels that he can not state his case and
get remedy.

RBI keeps
updating or modifies the guidelines governing ‘Asset Classification’, but,
borrowers feel that it has become so difficult for them to establish or
advocate their case even when they are not clearly willful defaulters and even
when a valuable and marketable security is lying with the Bank.

Whether it
is a Public Sector Bank or Private Sector Bank, borrowers should have a forum
providing speedy, effective and efficacious remedy.

Note: the views expressed are my personal, my own understanding
and I can be wrong in my views.

2/25/13

There
is every need for the Government to enable/assist the Banks in reducing their
NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well
assisted/equipped through the legal frame-work in recovering their dues. The
provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of
Financial Assets & Enforcement of Security Interest Act, 2002), judicial
pronouncements from time to time and amendments to the SARFAESI Act, 2002
enable the Banks to recover their dues speedily. While there should be emphasis
on the need and urgency of the Banks in reducing their NPAs, the rights of the
borrower can never be ignored. It is to be commended that the judiciary has
maintained a great balance between the rights of the Banks on the one hand and
rights of the borrowers on the other hand while interpreting the provisions of
SARFAESI Act, 2002. The Act talks of a right of appeal available to the
borrower/guarantor/aggrieved person against the possession notice issued by the
Bank under section 13 (4) of the Act. Time limit is prescribed to prefer an
appeal. If the appeal provision is interpreted in stricto senso, then, the borrower has to confine himself to the
issue of demand notice issued by the Bank under section 13 (2), the issue of
classification of an Account as NPA based on RBI guidelines, the issue of
objections raised by the Borrower, the reply given by the Bank if any etc.
issues and nothing more than that. If the provisions are seen strictly, then,
the Bank may not even be questioned when it fixes the reserve price and sells
the property for a very low price affecting the borrower and also the Bank at
times. Addressing these concerns, the judiciary has maintained that all actions
initiated by the Bank under the provisions of SARFAESI Act, 2002 can be
challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002.
Technically, if the borrower is silent in questioning the possession notice
issued by the Bank under section 13 (4) of the Act and chooses to question the
Sale Notice, then, the borrower has to confine himself to the procedure
followed by the Bank after the issuance of notice under section 13 (4) and the
issues pertaining to Sale of Secured Asset. When the borrower questions the
sale notice and did not question the notice under section 13 (4) within the
prescribed period, the borrower has to explain as to why he has failed to
question the notice under section 13 (4) within the prescribed period. In the
absence of satisfactory explanation as to why the borrower has failed to
question the possession notice under section 13 (4), his position to raise all
kinds of objections to the Bank’s demand becomes untenable.

However,
the system has become liberal and courts have also liberally interpreted the
provisions dealing with the ‘right of appeal’ provided to the borrower and the
borrower can question every action initiated by the Bank under the provisions
of SARFAESI Act, 2002. The borrower or any person aggrieved can approach the Civil Court in a
very limited situation where actually there is fraud or serious dispute with
regard to the title of the ‘secured asset’/property mortgaged. Though there can
be no bar on the jurisdiction of High Courts under Article 226 in dealing with
the grievances of the borrower against the Bank when the Bank initiates action,
the High Courts do desist in being alternative to the remedy available before
the DRT normally. As such, there is enough support to the Banks through
legal-framework in recovering their dues from the borrowers. It is true that in
the absence of a special legislation like SARFAESI Act, 2002, it would have
been very difficult for the Banks in recovering their dues and reducing their
NPAs. From the borrowers’ point of view, the borrowers allege that they do not
have an effective remedy against the illegal action being initiated by the Bank
using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT
can look into all allegations while entertaining an appeal under section 17 of
the Act and it includes the issue of disputes pertaining to the actual ‘debt’.
Then, it is also settled that the DRT can order re-possession of the ‘secured
asset’ when it is found that the Bank has illegally taken the possession of the
‘secured asset’. It is very important to look into various stages and issues
when the borrower prefers an appeal under section 17 of the SARFAESI Act, 2002
and those are as follows:

When
the borrower prefers an Appeal under section 17 against the Bank, the DRT can
grant ex-parte stay of proceedings against the Bank if there is sufficient
ground to that affect from the averments in the ‘Grounds of Appeal’ and
also the documents produced. If there is a caveat, then, the procedure
differs. Normally, the DRT orders notice to the Bank irrespective of the
fact as to whether it grants stay or not in-favour of the borrower. The DRT can also ask the borrower to
make some deposit while granting stay and it is also reasonable as the borrower
has to make the payments towards installments to the Bank in any case and
there can be some time lapse between the demand notice issued by the Bank
under section 13 (2) and the appeal.

The
Bank files its reply pursuant to the notice ordered by the DRT and they
normally justify their action and say that the action initiated by the
Bank is legal and the Appeal is liable to be dismissed. The Bank also can
ask for vacating the interim order and can pray for allowing the Bank to
continue with the further proceedings like Sale.

If
there is no interim order against the Bank while the Appeal is pending and
the Bank is allowed to proceed with the sale proceedings, the issue gets
complicated. The borrower should be allowed to raise any point and
additional grounds by way of additional affidavit in the pending Appeal
and there is nothing wrong in it and technicalities are to be ignored. For
example, the borrower might have chosen to challenge the possession notice
issued by the Bank under section 13 (4) and during the pendency of Appeal,
if the Bank initiates the Sale Proceedings, the borrower should be allowed
to question the Sale Proceedings in the same Appeal instead of bringing
technicalities and asking the borrower to challenge the Sale proceedings
separately.

Obviously,
during the pendency of SARFAESI Appeal, if the Bank proceeds with the sale
of ‘Secured Asset’, it is likely that the property may not fetch the
actual market value as the bidder discounts all the possible risks
associated with the bidding. If the Bank is able to raise the money and
can get the entire debt recovered through the sale consideration, then,
the Bank is safe and appeal under section 17 literally becomes meaningless
though it is usual to see an order where DRT says that ‘sale confirmation
is subject to the final disposal of Appeal’. Or DRT can allow the Bank to
proceed with the sale of Secured Asset and can say that the ‘sale
confirmation’ is to be stayed until further orders. Instead of doing this,
the DRT can dispose of the SARFAESI Appeal itself as it can ascertain the
facts so fast based on the averments in the SARFAESI Appeal, the documents
filed and the reply presented by the Bank.
Once the SARFAESI Appeal is finally disposed off then, it is not
easy to prefer an appeal against the final order of DRT as the borrower
will have to make pre-deposit with the DRAT which can vary from 50% to 75%
depending upon the discretion of the DRAT. Now, with the provision
enabling the Banks/secured creditors to bid for the property when the sale
is post-phoned for want of bidders, it has become much easy for the Banks
to deal with the ‘secured asset’ and claim recovery.

The
proceedings before DRT can not be compared to the proceedings before Civil Court
and adjudication process before the DRT is simple and can be fast.
However, it is also true that DRT requires time to look into the facts and
read the documents apart from hearing the oral submissions from the Bank.
Additional DRTs and DRATs can be constituted if required rather allowing
the borrower to suffer and feel that the remedy before the DRT and DRAT is
not effective.

Again,
the DRT can either allow the Appeal filed by the borrower under section 17
or dismiss the same finally. If the DRT allows the Appeal filed by the
borrower under section 17, then, it can order re-possession of the
‘secured asset’ if the physical possession of the ‘secured asset’ is
already taken. The Appeal can be allowed or dismissed either with costs or
without costs. More than this, I don’t think that the DRT can do anything
else or can give any direction to the Bank. For example, the borrower may
be entitled for getting his loan restructured at the given point of time
pursuant to some notification from the ministry of finance or RBI and the
Bank must have ignored it. Even then, the DRT can not direct the Bank to
restructure the loan of the borrower while disposing off the appeal. This
is where the borrower feels remediless at times. If the Bank is to be
asked to do something as per law, where can the borrower go?. The borrower
can give a representation to the Bank officials, can write to the superior
authorities and may approach the High Court under Article 226 of
Constitution of India seeking direction. However, even the High Court may
direct the Banks to consider the representation and with all the might and
luxury, the Bank can make the borrower to run from pillar to post. This
happens in many cases though the factor of habitual litigants can not be
ignored.

Very
rarely, the Appeal filed by the borrower gets allowed and even then, the
Bank will again be initiating the proceedings correcting the lacunae. For
example, during the pendency of Appeal under section 17, the borrower may
say that he is willing to regularize his account and abide by the loan
terms and the market value of the ‘secured asset’ can be intact. In such
cases, the Bank is in no way gets effected by regularizing the loan as it
collects the interest and also the legal expenses for initiating the
proceedings. However, the DRT can not give such a direction to the Bank
though it can orally ask the Banks to consider the proposal of the
borrower. Now with the recent amendments, the Secured Creditor is enabled
with the right of filing ‘Caveat’ and it presents many difficulties to the
borrower and it becomes now literally impossible to get an ‘ex-parte stay
order’ against the Bank. And also, it has become very easy for the Banks
to sell the ‘secured asset’ as there is no need of following separate
procedure of Sale if the ‘Sale’ is postponed for want of bidders etc.

It
is quite possible to ensure a system or practice under the provisions of
SARFAESI Act, 2002 which is fair and also effective. If the ‘secured asset’ is
valuable, then, there can not be any worry to the Bank at all as it can recover
the dues with interest and expenses. If the ‘secured asset’ is not valuable in
comparison to the dues recoverable, then, the officials of the Bank are to be
blamed as to how they have sanctioned the loan in the first place.

Emphasis
is always laid as to how to enable the Banks to speed-up their recovery, but,
little emphasis is laid as to how the borrower feels remediless in some cases. Even
while providing the best possible legal-framework enabling the Banks to recover
their dues, the concerns of the borrower can certainly be addressed and it is
very much possible. From the borrowers’ point of view, the following issues
need to be considered.

a.The Appeal mechanism under the
provisions of SARFAESI Act, 2002 can be liberal and the borrower should be
allowed to question every action initiated by the Bank under SARFAESI Act, 2002
without raising any technicalities like condonation of delay etc.

b.It should be mandatory on the part of
the Banks to mention marketability and market price/price of the ‘secured
asset’ in its reply to the appeal of the borrower under section 17 among other
things.

c.There should be time-limit for the
Banks in filing their reply in an appeal under section 17 of the Act and in the
absence of filing the reply within the specific period, the proceedings of the
Bank under SARFAESI Act against the borrower should automatically be stayed.

d.Though there is a time-limit for
disposing the Appeals under section 17 in the Act, the disposal normally takes
time. If work-load in the DRTs and DRATs is the main cause for the delay, then,
additional DRTs and DRATs can be constituted and so that, Appeals under section
17 and under section 18 of the Act can be disposed of as quickly as possible.

e.The scope of powers of the presiding
officer of DRT under section 17 should be expanded further and it should
include giving suitable directions to the Bank from time to time keeping the
need of ‘recovery of dues’ in mind.

With
the system aimed at speedy recovery and balanced heavily towards the Bank,
genuine borrowers who are not willful or habitual defaulters also get affected.
The borrowers feel remediless now and even if the remedy is provided, most of
the borrowers feel that the remedy provided is ineffective.

While
it is important to improve the financial health of the Banks/Financial
Institutions, there is no justification for a completely one-sided draconian
legal system where the borrower is harassed like anything. Bank officials
exercise great discretion and the Bank officials must be extremely happy with
the legal provisions now governing the recovery of ‘secured loans’ under
SARFAESI Act, 2002. It has become totally one-sided affair now and ordinary
citizens & small businesses may feel it better to approach the private
money leaders for their financial needs rather approaching Banks and Financial
Institutions in this country.

I
expect constitutional courts to entertain certain important issues under
SARFAESI Act, 2002 in public interest rather supporting every view of the
government.

There
is every need for the Government to enable/assist the Banks in reducing their
NPAs (Non-performing Assets) and it is beyond doubt that the Banks are now well
assisted/equipped through the legal frame-work in recovering their dues. The
provisions of SARFAESI Act, 2002 (The Securitisation and Reconstruction of
Financial Assets & Enforcement of Security Interest Act, 2002), judicial
pronouncements from time to time and amendments to the SARFAESI Act, 2002
enable the Banks to recover their dues speedily. While there should be emphasis
on the need and urgency of the Banks in reducing their NPAs, the rights of the
borrower can never be ignored. It is to be commended that the judiciary has
maintained a great balance between the rights of the Banks on the one hand and
rights of the borrowers on the other hand while interpreting the provisions of
SARFAESI Act, 2002. The Act talks of a right of appeal available to the
borrower/guarantor/aggrieved person against the possession notice issued by the
Bank under section 13 (4) of the Act. Time limit is prescribed to prefer an
appeal. If the appeal provision is interpreted in stricto senso, then, the borrower has to confine himself to the
issue of demand notice issued by the Bank under section 13 (2), the issue of
classification of an Account as NPA based on RBI guidelines, the issue of
objections raised by the Borrower, the reply given by the Bank if any etc.
issues and nothing more than that. If the provisions are seen strictly, then,
the Bank may not even be questioned when it fixes the reserve price and sells
the property for a very low price affecting the borrower and also the Bank at
times. Addressing these concerns, the judiciary has maintained that all actions
initiated by the Bank under the provisions of SARFAESI Act, 2002 can be
challenged by the borrower in an Appeal under section 17 of SARFAESI Act, 2002.
Technically, if the borrower is silent in questioning the possession notice
issued by the Bank under section 13 (4) of the Act and chooses to question the
Sale Notice, then, the borrower has to confine himself to the procedure
followed by the Bank after the issuance of notice under section 13 (4) and the
issues pertaining to Sale of Secured Asset. When the borrower questions the
sale notice and did not question the notice under section 13 (4) within the
prescribed period, the borrower has to explain as to why he has failed to
question the notice under section 13 (4) within the prescribed period. In the
absence of satisfactory explanation as to why the borrower has failed to
question the possession notice under section 13 (4), his position to raise all
kinds of objections to the Bank’s demand becomes untenable.

However,
the system has become liberal and courts have also liberally interpreted the
provisions dealing with the ‘right of appeal’ provided to the borrower and the
borrower can question every action initiated by the Bank under the provisions
of SARFAESI Act, 2002. The borrower or any person aggrieved can approach the Civil Court in a
very limited situation where actually there is fraud or serious dispute with
regard to the title of the ‘secured asset’/property mortgaged. Though there can
be no bar on the jurisdiction of High Courts under Article 226 in dealing with
the grievances of the borrower against the Bank when the Bank initiates action,
the High Courts do desist in being alternative to the remedy available before
the DRT normally. As such, there is enough support to the Banks through
legal-framework in recovering their dues from the borrowers. It is true that in
the absence of a special legislation like SARFAESI Act, 2002, it would have
been very difficult for the Banks in recovering their dues and reducing their
NPAs. From the borrowers’ point of view, the borrowers allege that they do not
have an effective remedy against the illegal action being initiated by the Bank
using the provisions of SARFAESI Act, 2002. The Courts have held that the DRT
can look into all allegations while entertaining an appeal under section 17 of
the Act and it includes the issue of disputes pertaining to the actual ‘debt’.
Then, it is also settled that the DRT can order re-possession of the ‘secured
asset’ when it is found that the Bank has illegally taken the possession of the
‘secured asset’. It is very important to look into various stages and issues
when the borrower prefers an appeal under section 17 of the SARFAESI Act, 2002
and those are as follows:

When
the borrower prefers an Appeal under section 17 against the Bank, the DRT can
grant ex-parte stay of proceedings against the Bank if there is sufficient
ground to that affect from the averments in the ‘Grounds of Appeal’ and
also the documents produced. If there is a caveat, then, the procedure
differs. Normally, the DRT orders notice to the Bank irrespective of the
fact as to whether it grants stay or not in-favour of the borrower. The DRT can also ask the borrower to
make some deposit while granting stay and it is also reasonable as the borrower
has to make the payments towards installments to the Bank in any case and
there can be some time lapse between the demand notice issued by the Bank
under section 13 (2) and the appeal.

The
Bank files its reply pursuant to the notice ordered by the DRT and they
normally justify their action and say that the action initiated by the
Bank is legal and the Appeal is liable to be dismissed. The Bank also can
ask for vacating the interim order and can pray for allowing the Bank to
continue with the further proceedings like Sale.

If
there is no interim order against the Bank while the Appeal is pending and
the Bank is allowed to proceed with the sale proceedings, the issue gets
complicated. The borrower should be allowed to raise any point and
additional grounds by way of additional affidavit in the pending Appeal
and there is nothing wrong in it and technicalities are to be ignored. For
example, the borrower might have chosen to challenge the possession notice
issued by the Bank under section 13 (4) and during the pendency of Appeal,
if the Bank initiates the Sale Proceedings, the borrower should be allowed
to question the Sale Proceedings in the same Appeal instead of bringing
technicalities and asking the borrower to challenge the Sale proceedings
separately.

Obviously,
during the pendency of SARFAESI Appeal, if the Bank proceeds with the sale
of ‘Secured Asset’, it is likely that the property may not fetch the
actual market value as the bidder discounts all the possible risks
associated with the bidding. If the Bank is able to raise the money and
can get the entire debt recovered through the sale consideration, then,
the Bank is safe and appeal under section 17 literally becomes meaningless
though it is usual to see an order where DRT says that ‘sale confirmation
is subject to the final disposal of Appeal’. Or DRT can allow the Bank to
proceed with the sale of Secured Asset and can say that the ‘sale
confirmation’ is to be stayed until further orders. Instead of doing this,
the DRT can dispose of the SARFAESI Appeal itself as it can ascertain the
facts so fast based on the averments in the SARFAESI Appeal, the documents
filed and the reply presented by the Bank.
Once the SARFAESI Appeal is finally disposed off then, it is not
easy to prefer an appeal against the final order of DRT as the borrower
will have to make pre-deposit with the DRAT which can vary from 50% to 75%
depending upon the discretion of the DRAT. Now, with the provision
enabling the Banks/secured creditors to bid for the property when the sale
is post-phoned for want of bidders, it has become much easy for the Banks
to deal with the ‘secured asset’ and claim recovery.

The
proceedings before DRT can not be compared to the proceedings before Civil Court
and adjudication process before the DRT is simple and can be fast.
However, it is also true that DRT requires time to look into the facts and
read the documents apart from hearing the oral submissions from the Bank.
Additional DRTs and DRATs can be constituted if required rather allowing
the borrower to suffer and feel that the remedy before the DRT and DRAT is
not effective.

Again,
the DRT can either allow the Appeal filed by the borrower under section 17
or dismiss the same finally. If the DRT allows the Appeal filed by the
borrower under section 17, then, it can order re-possession of the
‘secured asset’ if the physical possession of the ‘secured asset’ is
already taken. The Appeal can be allowed or dismissed either with costs or
without costs. More than this, I don’t think that the DRT can do anything
else or can give any direction to the Bank. For example, the borrower may
be entitled for getting his loan restructured at the given point of time
pursuant to some notification from the ministry of finance or RBI and the
Bank must have ignored it. Even then, the DRT can not direct the Bank to
restructure the loan of the borrower while disposing off the appeal. This
is where the borrower feels remediless at times. If the Bank is to be
asked to do something as per law, where can the borrower go?. The borrower
can give a representation to the Bank officials, can write to the superior
authorities and may approach the High Court under Article 226 of
Constitution of India seeking direction. However, even the High Court may
direct the Banks to consider the representation and with all the might and
luxury, the Bank can make the borrower to run from pillar to post. This
happens in many cases though the factor of habitual litigants can not be
ignored.

Very
rarely, the Appeal filed by the borrower gets allowed and even then, the
Bank will again be initiating the proceedings correcting the lacunae. For
example, during the pendency of Appeal under section 17, the borrower may
say that he is willing to regularize his account and abide by the loan
terms and the market value of the ‘secured asset’ can be intact. In such
cases, the Bank is in no way gets effected by regularizing the loan as it
collects the interest and also the legal expenses for initiating the
proceedings. However, the DRT can not give such a direction to the Bank
though it can orally ask the Banks to consider the proposal of the
borrower. Now with the recent amendments, the Secured Creditor is enabled
with the right of filing ‘Caveat’ and it presents many difficulties to the
borrower and it becomes now literally impossible to get an ‘ex-parte stay
order’ against the Bank. And also, it has become very easy for the Banks
to sell the ‘secured asset’ as there is no need of following separate
procedure of Sale if the ‘Sale’ is postponed for want of bidders etc.

It
is quite possible to ensure a system or practice under the provisions of
SARFAESI Act, 2002 which is fair and also effective. If the ‘secured asset’ is
valuable, then, there can not be any worry to the Bank at all as it can recover
the dues with interest and expenses. If the ‘secured asset’ is not valuable in
comparison to the dues recoverable, then, the officials of the Bank are to be
blamed as to how they have sanctioned the loan in the first place.

Emphasis
is always laid as to how to enable the Banks to speed-up their recovery, but,
little emphasis is laid as to how the borrower feels remediless in some cases. Even
while providing the best possible legal-framework enabling the Banks to recover
their dues, the concerns of the borrower can certainly be addressed and it is
very much possible. From the borrowers’ point of view, the following issues
need to be considered.

a.The Appeal mechanism under the
provisions of SARFAESI Act, 2002 can be liberal and the borrower should be
allowed to question every action initiated by the Bank under SARFAESI Act, 2002
without raising any technicalities like condonation of delay etc.

b.It should be mandatory on the part of
the Banks to mention marketability and market price/price of the ‘secured
asset’ in its reply to the appeal of the borrower under section 17 among other
things.

c.There should be time-limit for the
Banks in filing their reply in an appeal under section 17 of the Act and in the
absence of filing the reply within the specific period, the proceedings of the
Bank under SARFAESI Act against the borrower should automatically be stayed.

d.Though there is a time-limit for
disposing the Appeals under section 17 in the Act, the disposal normally takes
time. If work-load in the DRTs and DRATs is the main cause for the delay, then,
additional DRTs and DRATs can be constituted and so that, Appeals under section
17 and under section 18 of the Act can be disposed of as quickly as possible.

e.The scope of powers of the presiding
officer of DRT under section 17 should be expanded further and it should
include giving suitable directions to the Bank from time to time keeping the
need of ‘recovery of dues’ in mind.

With
the system aimed at speedy recovery and balanced heavily towards the Bank,
genuine borrowers who are not willful or habitual defaulters also get affected.
The borrowers feel remediless now and even if the remedy is provided, most of
the borrowers feel that the remedy provided is ineffective.

While
it is important to improve the financial health of the Banks/Financial
Institutions, there is no justification for a completely one-sided draconian
legal system where the borrower is harassed like anything. Bank officials
exercise great discretion and the Bank officials must be extremely happy with
the legal provisions now governing the recovery of ‘secured loans’ under
SARFAESI Act, 2002. It has become totally one-sided affair now and ordinary
citizens & small businesses may feel it better to approach the private
money leaders for their financial needs rather approaching Banks and Financial
Institutions in this country.

I
expect constitutional courts to entertain certain important issues under
SARFAESI Act, 2002 in public interest rather supporting every view of the
government.

8/22/12

It
is known that while some loan transactions with the Bank like Housing Loan,
Educational Loan etc. are very simple, some commercial loan transactions are
very complex in nature. The Bank may provide various loan facilities to the
Borrower and most of these commercial loans are complex to understand and these
loans infact involve many complexities. When a Businessmen or a Corporate gets
various loan facilities and if there is a default or allegation of default with
regard to a particular loan facility, the Bank proceeds against the borrower
and claims for the settlement of entire outstanding debt in respect of all
facilities. The Banks use the provisions of “Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act)” which appear to be draconian in some cases while the Act is justified
from another angle. Irrespective of the
long standing relation of creditor and borrower, in some cases, the Bank may be
unreasonable towards a borrower and may insist for recovery of the entire
outstanding dues even if the borrower commits a default in respect of only one
facility among many other facilities extended to the same borrower. The Bank
may say that they will proceed ‘borrower-wise’ in classifying any Account as
‘Non-performing Asset’ and proceed with the recovery process under the provisions
of SARFAESI Act, 2002. Banks or the officers concerned do exercise some
discretion in this regard while the Bank or the officers are left with no
discretion in respect of few other cases. The Bank has to follow the RBI
guidelines and the RBI circulars having binding nature from to time. It is
known that the Banks should follow the guidelines of ‘Asset Classification’
prescribed by the Reserve Bank of India in classifying any loan
account as ‘Non-performing Asset’. The guidelines never intended to unnecessarily
and unreasonably harass the borrowers. The guidelines refers to the
significance of looking at ‘risk factor’, the ‘value of security’, track record
of the borrower and even getting the loan Account updated though Bank usually
follows their internal guidelines.

In
some cases, the borrowers do not want to litigate the issues with the Bank and
may try their level best to get the default rectified and may try to get the
account settled finally under ‘One-time Settlement Scheme’. The Bank or the
officers concerned in most of the cases maintain written or oral communication
with the borrowers when there is default. The borrowers, in-turn, explains
their difficulties in view of their long standing relationship with the Bank
and may seek some relaxation and may seek indulgence of the Bank to rectify the
default in repayment. This communication or negotiation happens before
classifying any loan Account as “Non-performing Asset” and even after the
classification of account as NPA and before initiating the proceedings under
the provisions of SARFAESI Act, 2002. In some cases, the borrowers negotiate
with the Bank for rectifying the default or for a ‘final settlement’ even after
the issuance of demand notice by the Bank under section 13 (2) of the Act. This
is the reason as to why there is delay on the part of the Bank in proceeding with
the recovery under the provisions of SARFAESI Act, 2002 even after the issuance
of demand notice under section 13 (2). When a borrower intends to avoid
litigation, he may listen or act upon the oral understanding with the
officials. Sometimes, the understanding for ‘rectification of default’ or ‘settlement
of loan’ can be in writing also. While the ‘rectification of default’ is oral
in most of the cases, the ‘final settlement of the account’ is in writing
normally.

‘Settlement of Default of
Debt/Regularisation’:

It
is frequently alleged now-a-days by the borrowers that the Bank or the officers
of the Bank agrees for the ‘settlement for rectification of default’, receives
the money from the borrower and later-on, insists for the full settlement of
the outstanding due. Inspite of updating the loan account, the Bank may choose
to proceed under the provisions of SARFAESI Act, 2002 and may say that they are
acting on the basis of classification and they never agreed for ‘regularizing
the loan account’. This happens even after the demand notice issued under
section 13 (2). Even after the demand notice, the borrower can negotiate with
the Bank and the Bank may receive some substantial amount of money in-between
and even then, suddenly may choose to proceed with the issuance of notice under
section 13 (4). These are the usual allegations from the borrowers against the
Bank when it comes to ‘regularization of loan accounts’. The allegation in some cases is that the
Banks goes back from their promise and in some cases, the Bank is not
co-operating for regularization as even the RBI guidelines refer to the
regularization if other factors like the track-record, risk-factor, value of
security etc. are justified. Another thing is that the intention behind giving
notice to the borrower under section 13 (2) of the Act is to invite objections
if any. Law mandates the Bank to give a reasoned reply to the objections raised
by the borrower under section 13 (3A). But, what happens is that the Banks
agree for some kind of settlement either orally or in writing even after the
issuance of notice under section 13 (2). Later on, after a gap of some one year
and when the borrower makes the substantial payment, the Bank acts upon the
demand notice and issues a possession notice under section 13 (4) of the Act.
This is infact incorrect. If something notable has taken place with regard to
the recovery of loan after the issuance of notice under section 13 (2) and if
the Bank is silent in acting on section 13 (2) for a considerable time in view
of the payments made by the borrower, then, it is incumbent upon the Bank to
issue the demand notice afresh taking note of subsequent developments and this
fresh demand notice under section 13 (2) of SARFAESI Act can give an
opportunity to the borrower to include his objections afresh without taking a
direct recourse to an appeal to Debt Recovery Tribunal (DRT) or without having
to approach the High Court seeking intervention at times. But, this is not
happening. In most of the cases, unless the Debt Recovery Tribunal sets the
SARFAESI proceedings aside, the Banks do not issue demand notice twice under
section 13 (2) and instead acts upon the demand notice issued earlier irrespective
of time gap or lapse. These are the usual problems being faced by the borrowers
in getting his or their account regularized or updated. The borrowers are
infact left with no remedy in these cases as the scope of powers of DRT under
section 17 of the Act does not include the power to give direction to the Banks
to agree for regularization. These kinds of cases mostly come to High Court and
the High Courts usually issues suitable directions noting the interests of the
Bank and the rights and plight of the borrower.

‘Settlement of Debt/One-time
Settlements’:

The
second issue is with regard to ‘final settlement of debts’. In many cases,
Banks are going back from their promise of ‘one-time settlement’. The Banks
agree for ‘final settlement of account’ with the borrower. The Banks may ask
the borrower to give an offer letter in a format and with some averments and
then, the Banks will agree for settlement. When the substantial amount is paid,
the Banks may say and are saying in most of the cases that the RBI guidelines
do not allow them to get the account settled under ‘One-time Settlement’.
Again, the Banks may say that the borrower has not disclosed all the facts with
the Bank while coming forward with the ‘One-time Settlement Proposal’. Once the
settlement proposal is agreed, the Banks will be very silent till the
substantial amount is deposited with the Bank and finally, they can say that
they do not have right to go for ‘settlement’ or can blame the borrower that he
has not disclosed the whole facts. These
things do happen regularly now-a-days. The DRT normally do not look into these
issues and the DRT may at best, look at the procedural irregularities if any
and even the disputes pertaining to outstanding are not entertained as such
though the DRT can look into those issues. The DRT normally goes with the stand
taken by the Bank unless the Bank is apparently wrong in their approach. Public
Sector Banks should concentrate on the recovery of money and at the same time,
can not harass the borrowers who are willing to get their accounts regularized
or willing to get their account finally settled. Even, the RBI guidelines hint
at this. When there is security lying with the Bank and when original documents
are with the Bank, the Banks pressurize the borrowers with all kinds of things
and using the provisions of SARFAESI Act, 2002 to their advantage. The DRT in
these cases proves to be ineffective and the borrower is not entitled to
approach the Civil Court
in these cases in view of the bar under section 34 of SARFAESI Act, 2002.
Though there is a scope for the Civil Court to entertain even the SARFAESI
related matters in some cases in a limited sense pursuant to the Mardia
Chemical’s case, it is very difficult to persuade the Civil Court with regard
to its jurisdiction in SARFAEI matters and this can be attributed to the lack
of expertise on the part of the Civil Courts with the Securitisation Law.

Conclusion:

When
there is a borrower willing to get his account regularized and willing for
settlement, the Banks can not harass those borrowers. In most of the cases,
where the borrowers allege wrong treatment or breach of promise on the part of
Banks with regard to ‘settlement for regularization’ and ‘final settlement of
outstanding due’, the borrowers do approach the High Court and in most of the
cases, High Courts do justice to the Petitioner or the borrower keeping the
interests of the Bank and borrowers in view. High Courts are very careful in
interfering with the SARFAESI proceedings initiated by the Banks as it can not
be seen as an alternative to the Debt Recovery Tribunals (DRTs). But, in fit
cases, the High Courts may not agree with the arguments of the Banks with
regard alternative forum and may exercise the jurisdiction under Article 226 of
Constitution of India.

The
issue as to whether the Banks can go back from the ‘settlement of default’ or
‘settlement of loan’ will depend upon the facts of the case and especially the
contents of written offer and agreement by the Banks.

It
has almost settled and become like a regular practice for the borrowers to
question the proceedings initiated by the Banks at the last stage under the
provisions of “Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act)”. In fact, the law
mandates that the aggrieved can approach the Debt Recovery Tribunal under
section 17 of the SARFAESI Act, 2002 within 45 days from the date of issuance
of notice under section 13 (4) of the Act. However, as the process of recovery
of money do not end at the issuance of section 13 (4) of the Act and as it is
likely that the Bank can commit mistakes in the process and process even after
the issuance of notice under section 13 (4), it is settled that the borrower is
entitled to question all steps initiated by the Bank under the provisions of
SARFAESI Act, 2002. The borrowers have started questioning the Sale Process
conducted by the Bank and also started questioning the order of the Magistrate
under section 14 of the Act before the High Court regularly and as a result,
the Courts have consistently held that the borrower is entitled to question all
the steps initiated by the Bank under the provisions of SARFAESI Act, 2002. There
is another point in this. If the borrower is silent even after the receipt of
notice under section 13 (4) and do not prefer any appeal, there can be an
argument from the Bank that there is nothing wrong in the proceedings initiated
by the Bank till the notice under section 13 (4). If such an argument is
accepted and if the borrower is silent even after the receipt of notice under
section 13 (4) of the Act, then, the scope of Appeal preferred by the borrower
at a subsequent stage gets narrowed-down. If the Borrower challenges the Sale
Process only, the borrower may have to confine himself to the illegalities
committed by the Bank in the Sale Process. However, if the borrower could offer
some kind of explanation as to why he could not challenge the proceedings
initiated by the Bank under section 13 (4) of the Act, then, he must be allowed
to raise all the points in his Appeal under section 17 of SARFAESI Act, 2002.

When
an Appeal is prepared or preferred under section 17 of the SARFAESI Act, 2002,
there will be usual grounds with the intention of getting some time to repay
the loan. The usual grounds are vague and are like:

The
borrower is not a willful defaulter.

The
classification of Account as ‘Non-performing Asset (NPA)’ is incorrect.

The
interested charged is exorbitant.

No
notice or caution is issued by the Bank before classifying the Account as
‘NPA’.

The
outstanding claimed by the Bank is incorrect.

The
value of the ‘secured asset’ mortgaged with the Bank is much more than the
outstanding loan.

The
Bank has not issued any notice or demand notice under section 13 (2) or 13
(4) of the Act etc.

These
are the usual grounds in any SARFAESI Appeal preferred by the borrower under
section 17 of the Act. As the law is settled that the procedure prescribed
under the provisions of SARFAESI Act, 2002 is mandatory, the Debt Recovery
Tribunal has to give a serious thought to the averment made in the Appeal that
no demand notice is received by the borrower under section 13 (2) or 13 (4). If
that is established, then, the Appeal deserves to be allowed straight-away and
without any further enquiry. But, for knowing this, the DRT may give notice to
the Bank to file their counter and to ascertain the truth. This process will
take time as there will be a procedure for the paper work done legally in any
Public Sector Bank. At times, it may take few months also. In view of the averments in the Appeal that
no notice is issued under section 13 (2) or 13 (4), the DRT may consider
granting relief to the Appellant or the borrower. While doing so, the Debt
Recovery Tribunal will consider the outstanding payable, the security and the
averments with regard to the value of security mortgaged with the Bank. In view of these practical and procedural
difficulties, the DRT may be forced to grant an interim-stay of further
proceedings initiated by the Bank and the DRT may insist that the borrower
remits some deposit and usually it can be from 10% to 30% depending upon the
discretion of the DRT. It all depends upon the averments made in the Appeal. It
would be extremely difficult for the DRT to ascertain the facts by looking at
the averments in the Appeal and if the DRT refrains from granting any
interim-order, then, there is a possibility that the Bank proceeds with the
process and even can complete the Sale Process at times creating some third
party interest which will further complicate issues.

But,
when a borrower is serious in raising objections in his appeal under section
17, those objections to be in detail and specific. If the grounds in an Appeal
under section 17 of SARFAESI Act, 2002 are mechanical and vague, then, it is
very much possible for the DRT to come to an easy conclusion that the Appeal is
preferred only to drag the proceedings and nothing more. In those
circumstances, as soon as the Bank files its counter affidavit answering all
the allegations in the Appeal preferred under section 17, the DRT may dismiss
the Appeal. If the Appeal grounds are so vague and mechanical, it would be very
difficult for the borrower to bring any new or additional facts in any further
appeal proceedings before the DRAT or to the High Court subsequently. However,
if the borrower chooses to file an appeal challenging the possession notice
issued by the bank under section 13 (4) and while the Appeal is pending if the
Bank goes ahead with further process with infirmities and illegalities, then,
the Borrower is entitled to bring those further infirmities and illegalities in
the form of an additional affidavit in the Appeal. As such, when the borrower
is serious in his attempt to fight with the Bank challenging the SARFAESI
proceedings under section 17 of the Act, pleadings to be detailed and perfect
rather mechanical and vague. Even the DRT may not give much weight to the
Appeal and the equities beyond a certain point if the grounds raised in the
Appeal under section 17 are so vague and mechanical.

There
may be instances where the borrower is not interested to fight with the Bank
and instead may want to update the loan account and he must even have taken
steps to do that. Under such circumstances, if the Bank is unreasonable and
proceeds with their proceedings, then, the borrower can very well stick to his
stand very firmly that he is not willful defaulter, has a fairly good track
record in repayment issues, has the valuable security lying with the Bank and
can continue to insist that the Bank is illegal in not agreeing to update the
Account. It is a very interesting point if this stand is taken before the DRT.
The DRT is empowered with certain powers under section 17 while entertaining an
appeal from the borrower or any aggrieved person. Initially, the function of
the DRT is to look into the procedural lapses committed by the Bank and nothing
more. Later-on, the Courts have expanded the scope of powers of DRT and held
that the DRT can look into the disputes pertaining to the outstanding claimed
and all other issues and the DRT is even empowered to restore the possession
back to the borrower if the physical possession of the property is taken by the
Bank already. However, the DRT continues to exercise very limited powers and
due this also; many Writ Petitions are filed to the High Court and even on
SARFAESI issues, the High Courts issue directions to the Bank very frequently.
While the DRT exercises some limited powers, there can not be any limitation on
the powers or the power to issue directions by the High Court from time to time
under Article 226 of Constitution of India.

Irrespective
of the powers of the DRT under section 17 of SARFAESI Act, 2002, the borrowers
should take-up all possible legal points in detail to the extent possible. Only
due to the confusion with regard to the powers of DRT under section 17, the borrowers
continue to approach Civil Courts at times and continue to approach the High
Court very regularly. There can be a case where the borrower admits the minor
default in repayment, he must have been other-wise good in repayment issues and
must have expressed his willingness to update his account without raising any
kind of litigation. If such is the attitude of the borrower, then, the borrower
may prefer to approach the High Court seeking a suitable direction to allow him
to get his account updated as even the RBI guidelines permit that and cautions against
unnecessary harassment to the borrowers using technicalities. If this kind of
cases are taken to DRT, then, apart from the expenses involved, the procedure
before the DRT is different and the procedure delays the efforts of the
borrower to get his account updated and the DRT may finally choose to look into
the issue as to whether there is any procedural irregularity on the part of the
Bank under the Act. An account which should have been updated very easily, may
end-up as ‘Non-performing Asset’ forcibly and can lead to long litigation with
the DRT, DRAT, High Court and Supreme Court and more interim applications
in-between. It will not benefit either the borrower or the Bank and the Bank
must be with the intention that they can recover the legal expenses incurred
from the borrower finally.

As
such, the borrowers should be very clear in their approach and should be
careful in raising objections in their Appeal under section 17 of the SARFAESI
Act, 2002.

7/20/12

It
is known that section 399 of the Companies Act, 1956 entitles minority
shareholders, subject to the qualification prescribed, to approach the Company
Law Board (CLB) under section 397/398 of the Companies Act, 1956 seeking relief
against the ‘oppression and mis-management’ from the majority shareholders in
the Company. As majority shareholders effectively controls the Board through
their say in General Body Meetings, the protection to the majority is not
envisaged though even the majority can approach the Company Law Board under
section 397/398 of the Companies Act, 1956 when they become artificial minority
under certain circumstances. There were several principles and precedents
developed over the time on the scope of section 397/398 of the Companies Act,
1956 and these proceedings are seen as most complex usually. Though even the
liquidation proceedings exercised by the High Court are complex at times, the
proceedings under section 397/398 of the Companies Act, 1956 are really complex
as the Board would be exercising its power to ‘put an end to the matters
complained of’. Dealing with the scope of the provisions dealing with the
‘oppression and mismanagement’ under Companies Act, 1956, the Hon’ble Bombay
High Court in Mauli Chand Sharma and another Vs. Union of India and others,
(1977) 47 Com Cases 92, has held
that:

“chapter
II of the Act, which includes section 255, deals with corporate management of
the company through directors in normal circumstances, while Chapter VI, which
contains sections 397, 398 and 402, deals with emergent situations or
extraordinary circumstances where the normal corporate management has failed
and has run into oppression or mismanagement and steps are required to be taken
to prevent oppression and/or mismanagement in the conduct of the affairs of the
company. In the context of this scheme having regard to the object that is
sought to be achieved by sections 397 and 398 read with sections 402, the
powers of the court under can not be read as subject to the provisions
contained in the other chapters which deal with normal corporate management of
a company. Further, an analysis of the sections contained in Chapter VI of the
Act will also indicate that the powers of the court under sections 397 and 398
read with section 402 can not be read as being subject to the other provisions
contained in sections dealing with usual corporate management of a company in
normal circumstances. The topic or subjects dealt with by sections 397 and 398
are such that it becomes impossible to read any such restriction or limitation
on the powers of the court acting under section 402. Without prejudice to the
generality of the powers conferred on the court under these sections, section
402 proceeds to indicate what types of orders the court could pass. Under
clause (a) of section 402, the court’s order may provide for the regulation of
the conduct of the company’s affairs in future and under clause (g) the courts
order may provide for any other matter for which in the opinion of the court it
is just and equitable that provision should be made. An examination of the
aforesaid sections brings out two aspects; first, the very wide nature of the
power conferred on the court, and secondly, the object that is sought to be
achieved by the exercise of such power, with the result that the only
limitation that could be impliedly read on the exercise of the empower would be
that nexus must exist between the order
that may be passed thereunder and the object sought to be achieved by those
sections and beyond this limitation which arises by necessary implication it is
difficult to read any other restriction or limitation on the exercise of the
court’s power. Further, section 397 and 398 are intended to avoid winding up of
the company if possible and keep it going while at the same time relieving in
minority shareholders from acts of oppression and mismanagement or preventing
its affairs being conducted in a manner prejudicial to public interest and, if
that be the objective, the court must have power to interfere with he normal
corporate management of the company, and to supplant the entire corporate
management, or rather, mismanagement, by resorting to non-corporate management
which may take the form of appointing an administrator or a special officer or
a committee of advisers, etc., who would be in charge of the company”.

Though
I am not going to deal with many issues under section 397/398 of the Companies
Act, 1956, it is very important to understand two important pre-requisites to
maintain a petition under section 397/398 and those are as follows:

(1)Minority shareholders approaching CLB
should establish clearly that they hold the requisite qualification under
section 399.

(2)Minority shareholders approaching the
CLB should establish a prima-facie case though no case gets dismissed
now-a-days on the issue of ‘non-establishment’ of prima-facie case as it can
amount to giving a finding on the main petition itself at times.

If
we keep the qualification issue apart, it is long been settled that ‘an
isolated incident’ can not entitle the minority shareholders to approach the
Board under section 397/398 of the Act. There are several precedents on the
issue though a lenient view is taken now-a-days on the issue of ‘continuity of
acts’. Even isolated incident in the Company can lead to the intervention of
the CLB under section 397/398 of the Companies Act, 1956 depending on as to how
the Board considers the effect of that incident. It establishes a point that
there can be issues between the minority and majority which can be settled
before any other forum like Civil Court etc. without invoking the jurisdiction
of Company Law Board under section 397/398. There can be an issue of
enforcement of an agreement between two groups in the Company and that dispute
can be settled through a Civil
Court or by an Arbitrator if the agreement
contains an Arbitration Clause. Thus, if the disputes erupt between the groups
in the Company, then, one group may file a Criminal Complaint on the other group,
may file a Civil Suit and even can ask for an appointment of arbitrator to look
into the disputes if the cause for the dispute is with regard to the
‘enforcement of any specific agreement’.

Res-subjudice &
Res-judicata:

The
point is as to what is the effect of pending or concluded legal proceedings to
the proceedings under section 397/398 of the Companies Act, 1956. Can the Board
ignore the findings of concluded proceedings? Can the Board give a different
finding on the issue concluded by other forum?. Can the Board ignore the
pending legal proceedings between the minority and majority? Etc. The issue of
approaching two forums with the same relief and seeking the same relief
concluded by the competent forum are dealt-with under section 10 and 11 of
Civil Procedure Code, 1908 and those are reproduced below without explanations.

“10. Stay of Suit – No court shall proceed with the trial
of any suit in which the matter in issue is also directly and substantially in
issue in a previously instituted suit between the same parties, or between
parties under whom they or any of them claim litigating under the same title
where such suit is pending in the same or any other Court in India having
jurisdiction to grant the relief claimed, or in any court beyond the limits of
India established or continued by the Central Government and having like
jurisdiction or before the Supreme Court.”

“11. Res Judicata – No court shall try any suit or issue
in which the matter directly or substantially in issue has been directly or
substantially is in issue in a former suit between the same parties, or between
the parties under whom they or any of them claim, litigating under the same
title, in a court competent to try such subsequent suit or the suit in which
such issue has been subsequently raised, and has been heard and finally decided
by such court.”

These
two principles are so important in a proceeding under section 397/398 of the
Companies Act, 1956 though now-a-days it is rare to see a litigation pending in
a Civil Court
between the minority shareholders and majority or the Company. Certain settled
legal principles like Res subjudice and
Res judicata are to be followed by
any judicial authority or quasi-judicial authority as it is supported by sound
logic. This is similar to the ‘principle of natural justice’. However,
application of these principles to the proceedings under section 397/398 of the
Companies Act, 1956 are most complex and the Board exercises lot of discretion
in this regard making a balance between the settled legal principles and the
object of section 397/398.

Simultaneous
jurisdiction:

Explaining
a to how the shareholders are entitled to approach Civil Court or Arbitrator at
times and as to how the CLB too has power to look into the issue, the Court in CDS Financial Services (Mauritius) Limited
Vs. BPL Communications Limited and others, (2004) 121 Comp Cases 375, has
held that:

“when
there is no express provision excluding the jurisdiction of the civil courts,
such exclusion can be implied only in cases where a right itself is created and
the machinery of enforcement of such right is also provided by the statute. If
the right is traceable to the general law of contracts or it is a common law
right, it can be enforced through the civil court, even though the forum under
the statute also will have jurisdiction to enforce that right. Sections 397,
398 and 408 of the Companies Act, 1956, do not confer exclusive jurisdiction on
the company court to grant reliefs against oppression and mismanagement. The
scope of these sections is to provide a convenient remedy for minority
shareholders under certain conditions and the provisions therein are not
intended to exclude all other remedies”.

Possible misuse:

With
the simultaneous jurisdiction and shareholders having a scope to approach Civil Court or
Arbitrator and also approach CLB at times, there is a possibility for
converting the jurisdiction of CLB under section 397/398 to that of a Civil Court. It is
very much possible as even isolated incidents are considered under section
397/398 of the Companies Act, 1956 though it depends upon as to how the CLB
views it. Though it was a case of
exercise of powers by Company Court, dealing with the similar issue, the Court in B.Ramachandra Adityan Vs. Educational
Trustee Co. (P) Ltd and another, (2003) 5 Comp LJ 413 (Mad), has held that:

“It
is, no doubt, true that the scope of the civil suit is different as the
proposed suit is one under the general law and the scope of the company
petition is different. But, it will not be open to convert the proceedings in
the company Court, which are summary in nature and to use the finding arrived
at in the summary proceeding, if it is favourable to the petitioner, in the
civil proceeding. It is in the sense that the proceedings under the company law
are an abuse of the process of the court and it is well settled that the
proceeding herein can not be used for some oblique or some extraneous purpose”.

Striking a balance:

Dealing
with the issue, the Company Law Board in RDF
Power Projects Ltd. and others Vs. M.Murali Krishna and others, (2005) 4 Comp
LJ 97 (CLB),has held that:

“the
object of section 10 of the Code of Civil Procedure 1908, is to avoid
conflicting decisions of two competent courts over the same matter and save the
time of the court, where the subsequent proceedings are initiated in the same
matter. By virtue of section 10, a court shall not proceed with the trail of a
suit in which the matter is directly and substantially the same as the one in
issue in a previously instituted pending between the same parties or parties
under whom they claim to litigate under the same title. The following are
essential conditions for application of the provisions of section 10:

(a)There must be two pending suits on the
same matter.

(b)These suits must be between the same
parties or parties under whom they or any of them claim to litigate under the
same title.

(c)The matter in issue must be directly
and substantially the same in both the suits.

(d)The suits must be pending before the
competent court or courts.”

Further,
the Board has observed that “in the light of the provisions of section 10, the
subject matter involved both in the Civil
Court and the Company Law Board must be examined”.
Further, the Board went on observing that “a careful analysis of the issues
both before the Civil Court
and the Company Law Board would indicate that the whole of the subject matter
in these proceedings is not identical. Section 10 is not attracted if one or
some of the issues are in common as held by the courts in a number of
decisions. The entire subject-matter of the company petition is not covered by
the previously instituted suit. It is free from doubt that there is no
substantial identity of the subject-matter before the Civil Court and the Company Law Board. The
only issue before the Civil Court
is in regard to the right of the second applicant to continue in the office of
the managing director of the company. As a result the petitioners shall not
interfere in the functioning of the company. Thus, none of the other
contentious issues raised in the company petition is before the Civil Court.
Therefore, the decision of the Civil
Court will not definitely affect the decision in
the present company petition, save the continuance of second applicant as the
managing director, in which case it can not be said that the matter in issue is
directly and substantially is the same in both the proceedings. Section 10
would only apply, in my view, where the decision in previous suit will
definitely affect the decision in the later proceedings. Moreover, sections 397
and 398 provide adequate relief to the aggrieved members on account of the
possible oppression by the majority and a Civil Court can not usurp the powers of a
Company Court,
whose jurisdiction brings from an enactment of Parliament and adjudge common
law rights on a priorconsideration”.

Conclusion:

1.The CLB can certainly look into the
concluded proceedings, but, can not give a different finding on the same issue
concluded by a Competent Court.

2.The Petitioners approaching the CLB can
refer to the concluded proceedings; however, the petitioners may not be able to
get a relief with the similar or same grievances raised in the concluded
proceedings.

3.Irrespective of pendency of any
proceedings between the majority and the minority, the CLB can entertain a
petition under section 397/398 of the Act and the CLB will take an appropriate
decision as to the issue of grant of relief or the maintainability of a
petition under those circumstances.

4.When it comes to the issue of applicability
of settled legal principles like Res
Judicata or Res Judice, the CLB
will exercise its discretion based on the facts of the case and no hard and
fast rule can be laid in this regard.

Disclaimer

No one is responsible for any claims if somebody finds that the information/opinions provided in this blog is incorrect and the blog is meant only to share knowledge and exchange views in a meaningful manner.